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March 20, 2013

Squeezing Italy

Italy is feeling the pinch. Not only is its economy still struggling amid the European debt crisis, but factors from politics to competition from China, within its very shores, are complicating its problems.

In the election just past, the most unlikely of parties, comic Beppo Grillo’s Five-Star Party, garnered enough votes to negate both the center-left party, led by Pier Luigi Bersani, and the center-right party, led by Silvio Berlusconi, so that no single party won enough votes to rule. The vote was a resounding mandate against Prime Minister Mario Monti’s austerity program, which has been wildly unpopular since its inception. Bersani refused the idea of forming a coalition government with Berlusconi, and Grillo said he would support whichever party was willing to make the reforms his party called for.

While some officials called for new elections, neither of the mainstream parties is anxious to return to the polls, although Grillo said he believed that the government formed as a result of the election will last no longer than six months. The lira fell after the election results were announced, and stock markets all over Europe registered their displeasure with the outcome, since it puts the continuation of the austerity program, and Italy’s ability to repay its debts, in doubt.

However, some analysts view the turmoil as a buying opportunity, particularly since economists have already begun to voice the opinion that austerity by itself is no solution to Europe’s debt woes. In fact, it could be looked upon as a move toward growth strategies by a government more focused on cutting unemployment than on cutting spending. That could be a very welcome change for a country that’s been in recession since the middle of 2011, with one of the lowest growth rates in the world.

Until the election results shake themselves out for good or ill, there are plenty of other issues on the horizon: the country has also been dealing with the fallout from its share trade tax, rising unemployment, falling car sales, and a blow to its fashion industry.

The share trade tax, which took effect March 1, caused market volumes to tumble as investors registered their disapproval of the levy. Some firms have given orders to cease all trading in Italian stocks as they look to protect clients from having to pay the tax. The extra cost will have to be paid sooner or later, however, since in less than a year the European Commission’s 11-country tax will take effect, hitting a much broader field of investors. And on July 1, Italy’s market situation will become even more complex as it adds a tax on derivative trades to the mix.

An unemployment rate of 11.7% in January, a 21-year high and an increase from December’s 11.3% level, had Italians further tightening their belts. The results showed in the sales of new automobiles, which fell 17.4% YOY in February, according to the Italian Transport Ministry, after losing 17.58% in January. For all of 2012, new car sales lost 19.8%—pretty dismal figures for the fourth largest car market in Europe.

Factory output felt the effects of recession and high unemployment as well, with Markit Economics’ retail and manufacturing purchasing managers’ indices both showing declines. The retail PMI indicated a slower rate of decline in sales than previous months, but, according to the report, the “difference between actual and targeted sales was greater than in the opening month of the year.” The manufacturing PMI, however, indicated that new orders fell for the fastest rate in three years, while job losses were the “sharpest in 27 months” and export orders fell “solidly.”

Last but far from least is the pressure on the Italian fashion market, which thrived in the past without any help from the government. According to Texas-based media analytics company Global Language Monitor, Italy is the only country in the world with three cities in the top 20 fashion capitals of the world: Rome and Milan, both in the top 10, and Florence in 16th place.

However, the financial crisis has taken a toll on the fashion sector as well. Global sales of Italian fashion lost 5.4% in 2012, and are expected to drop another 3.5% in 2013, according to textile and fashion group Sistema Moda Italia. So the Italian government is backing the industry with funding—in part because a new threat has arisen within its own borders.

One means of support the government is offering is a tax credit for clothing materials production; another is direct government funding for small- and mid-sized businesses in the sector. The purpose, according to Claudio Scajola, the country’s economic development minister, is to “safeguard the crucial ‘Made in Italy’ sector and to generate the conditions to allow companies to be more competitive on international markets after the crisis.”

And that safeguard is necessary. China is making inroads through “backdoor globalization,” with some 4,000 Chinese-run clothing factories blooming in Tuscany, in the town of Prato. Formerly, small textile companies in Prato would make clothing as a sideline to their Italian-made textiles, and often used Chinese workers to cut costs as they did so.

Now, however, the Chinese have usurped those small Italian companies’ position. Chinese companies have set up shop in Prato, and are making clothing with imported Chinese textiles that are substantially lower in cost than domestic Italian fabrics. Then the Chinese businesses export their wares, selling them outside Italy to those looking for Italian-made garments at a bargain price. The garments are still “made in Italy,” with tags that identify them accordingly, but the cost is far lower—particularly since it is believed by the Guardia di Finanza that there are thousands of illegal Chinese immigrants in the country doing the work—perhaps spurred on by Chinese organized crime.